“If we listened to our intellect, we’d never have a love affair. We’d never have a friendship. We’d never go into business, because we’d be cynical. Well, that’s nonsense. You’ve got to jump off cliffs all the time and build your wings on the way down.” -- Ray Bradbury
This year’s Jackson Hole performance by Ben Bernanke was just good enough to prop up Wall Street on Friday, with the Dow Jones Industrial Average (DJIA) jumping up 90 points and the S&P 500 Index gaining seven points while defending the psychologically important 1400 level.
While hardly a boffo performance by any measure, it was probably as much as anyone could have reasonably expected from the Fed chief, particularly in light of the fact that September’s scheduled FOMC meeting remains the more likely staging ground for any meaningful commitment by Big Ben.
The key points stressed by Bernanke to the gathering of central bankers in Wyoming revolved around the fact that the labor market is mired in something akin to a perpetual state of stagnation, as reflected in the 8.2% unemployment level, and that inflation essentially can be considered to be well under control, hovering under the 1.5% level. The reason that these can be regarded as the main ingredients in assessing expectations of probable Fed action is that they are essential to its original mandate. The tacit acknowledgement by Bernanke at Jackson Hole that the U.S. economy is clearly languishing in terms of growth sets the stage for some new version of quantitative easing to ensue.
So what would QE3 look like, and what impact will it have on the market? Simply put, respectively, more bond purchasing, and not much in the long term.
While the situation over in Europe is, at least for the moment, far more tenuous than here at home, the nature of the stimulus being discussed by both the Fed and its eurozone counterpart, the European Central Bank (ECB), is similar. Government bond purchases are the hot topic on both sides of the Atlantic and seem to be, at least for now, the focus of attention of both central banks.
For the Fed, it is clear from the Jackson Hole speech that Bernanke believes that the Fed’s balance sheet can handle additional asset purchases, and that additional, though limited, stimulus would not likely increase inflation levels substantially.
On the other hand, for the ECB, a similar program is widely acknowledged as one of the best and perhaps only solutions available to address the down-spiraling sovereign debt crisis. Yet the path towards implementation of such a program remains quite difficult, in spite of the pledge by the ECB’s president to do “whatever it takes” to keep the euro a viable currency. The internal politics of the eurozone’s largest economy, Germany, remains as the major obstacle to any sort of direct bond purchasing program.
So, while Bernanke still must navigate the muddy waters of the Fed’s regional bank presidents, he still is the one with the most power and, ultimately, the final say. His job must seem relatively simple to the leaders of the eurozone, who must deal with issues such as a deeply entrenched nationalism among its member-nations and an economy that is sinking ever deeper into recession.
As to the likely effect of QE3 being announced in September? To a certain extent, the impact is likely to be constrained, beyond the to-be-expected initial Wall Street jubilation. This is an assumption based on the relatively negligible impact of QE2. The fact is, the effect of a new round of limited stimulus can be expected to have a similar limited impact on the economy, even though the market may benefit for the short term.
Factor in the increased uncertainty that is sure to emerge as the U.S. Presidential elections take center stage, and investors could hardly be blamed if they decided to sit tight on whatever pile of cash they might have, at least for the moment, even though the siren song of QE3 may seem to be too provocative to resist.
ETF Periscope
Full disclosure: The author does not personally hold any of the ETFs mentioned in this week’s “What the Periscope Sees.”
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